ON THE BORDER: If Chinese investors stampede, metals could get trampled too

Some non-commodity markets have been rocked as Chinese investors buy and sell, and as their actions are triggered by chatroom contagion, they could shake metals markets too.

Some non-commodity markets have been rocked as Chinese investors buy and sell, and as their actions are triggered by chatroom contagion, they could shake metals markets too.

To explain, says John Browning, md of Hong Kong-based BANDS Financial, I should recount a conversation I had with the ceo of a company whose online social platform is changing the way investors interact and do business.

Late last year, I had lunch with a friend who, in early 2014, became the ceo of a Chinese equities broker. He outlined that when he joined the company it had 7,500 online retail equity customers.

“So how’s business?” I asked.

“Good, very good; excellent in fact. In the past 18 months, we opened an additional 50,000 client accounts, and what is really amazing is that we don’t have any salesmen.”

As the main course arrived, my friend outlined that his brokerage supports and distributes a free social messaging app. Users of the app are shepherded into groups that focus on an economic topic or a particular stock. Unlike We Chat or WhatsApp, the intention is that messages are broadcast to everyone within the same interest group.

“A group might focus on Alibaba, the GDP numbers, the US elections; the users just create whatever they want, as long as it is economy-related. Users can join as many groups as they like.”

My friend’s company now had over 300,000 active users of the free app of which 57,500 had been converted into clients; that is, 57,500 online retail equity investors.

As the plates were taken away he went on to say, “Not only do the clients chat to each other about a particular stock, they have become the frontline client support function as they give each other advice on how to use the app, and beyond that they give each other advice on how to use the trading platform itself.”

Clearly my friend had successfully co-mingled social messaging with equity broking, but that didn’t explain why there were no salespeople.

“For the client-take-on and know-your-customer functions, we have agents who are like paralegals, in every city. They go to visit potential clients wherever they are – at home, in the office, or in Starbucks. Our agent checks the potential clients’ documentation and ID, countersigns the documents as a witness, then sends the documents on to head office for processing.”

And there you have it. If you want to know why the Chinese stock market sometimes resembles a bunch of six-year-olds playing football, where no amount of instruction from the sidelines from teachers or parents will get them to do anything but run after the ball, up and down the pitch, always chasing the next best thing, then re-read the information above that I have just given you.

Access to the Chinese stock market is almost frictionless. Clients are marshalled into groups that naturally engender a herd mentality, and there is little regard to the suitability of an investment to the type of client. Now that’s not all a bad thing. But a dispassionate observer may think the relationship between the small investor and the financial services may have got too far in advance of the regulator to protect the investor.

However, allowing your clients to talk directly with each other is very brave. I cannot think of any other company that does the same. Most companies limit themselves to a message from the chairman at the end of the financial year or an occasional blog from the ceo.

Unwittingly, my friend has engaged in a huge experiment in client democracy which could become an ideal subject for a doctoral thesis. My friend has empowered his clients by giving them information and a trading platform through which they express their decisions. I wonder what would happen if those companies or exchanges that worry about their declining market share did the same.

Even the lack of protection is a symbiotic relationship between the investors and the brokers. The online chatrooms will tell you; in China every investor has the opportunity to become rich. Their thinking is: “If only the God of Luck will be with me next time, I will try.”

Although in the current downturn, the small investor in China has taken a beating and is heading for the exit, in those Chinese online communities the successful investors are real rock stars, each one with their own growing fan base and ardent imitators.

Chatroom contagion does not hang on a measured reading of well-informed analysts, but frequently on one star investor. Traders in the region are fully aware, when Chinese investors move, it is like being hit by a 16-wheeled truck, nothing is the same afterwards.

John Browning
Managing director, BANDS Financial Ltd